A Primer for Incubating Child Care Businesses

The need for childcare is well known. So too are the costs of not having childcare. Without access to quality childcare, many parents cannot work full time and become trapped in a cycle of poverty. Shortages in childcare not only limit family income but in some cases, keep parents out of the workforce altogether. 

What can be done to address this gap? The need to develop more childcare businesses is obvious, but how to build and sustain viable childcare businesses is not. 

Coastal Enterprises, Inc., the community development financial institution where I work, lends to families and businesses throughout the state of Maine. Back in 2019, during a listening tour of the seven rural Maine counties that border Canada, we learned that many people—predominantly women with a passion for early childhood education—would like to start a home- or facility-based childcare but lack the business acumen and confidence to get started. 

The need to develop more childcare businesses is obvious, but how to build and sustain viable childcare businesses is not.

As a result, four years ago, in March 2020 we started what we now call the CEI Child Care Business Lab, an incubator that teaches the specific business skills needed to open, staff, and operate a licensed quality childcare business. To date, through this incubator, 19 new businesses licensed for a total of 390 children have opened. Nine others are in the process of becoming licensed.

Below, we share successes, challenges, and lessons learned to encourage others, especially CDFIs, to consider developing similar programs in their communities. 

Any CDFI or other nonprofit seeking to build a childcare business incubator should consider five main factors: 1) identifying focus communities and cohort members, 2) crafting the incubation curriculum, 3) designing both peer and external mentoring support systems, 4) creating appropriate finance tools, and 5) developing a sustainable funding model for the incubator itself. We turn to each of these themes below.

Identifying Key Markets and Building the Cohort

To begin, it is important to understand what a childcare business lab is. It is not actually a physical space like a chemistry lab. Rather it’s a concept that supports learning, innovation, and adaptation. We’ve found, especially because of the importance of peer support and mentoring, is that a “cohort” model works best. In the Child Care Business Lab we designed, we offer a six-month course of trainings to one cohort at a time.

Recruiting a cohort is tricky. It begins with identifying where there is a gap between the number of licensed childcare slots and the number of children under the age of five needing care, and then going into the community to find prospective entrepreneurs. Our initial focus was on counties with poverty and unemployment rates that exceeded statewide averages. We also deliberately sought out people outside the entrepreneurship ecosystem who had a desire to work with children. In identifying promising individuals for these early cohorts, we sought to connect with stakeholders in rural communities and conduct outreach through adult education programs, community colleges, and employment service providers. 

It is also important to identify why previous childcare businesses in the area have failed. It’s widely documented that nationwide there is an economic mismatch between what parents can afford to pay and the cost of providing quality care. The biggest business expense for providers is labor, driven by state-mandated child-to-staff ratios. The pandemic further stressed this business model. Indeed, at the height of the COVID pandemic, about half of Maine’s childcare businesses shut down, as parents kept children at home because they were no longer commuting or were concerned about the virus. That only made the profit/loss calculation for childcare operators tighter.

For these reasons, before recruiting a cohort, we seek to identify and survey those nearby who shut their childcare businesses to learn why they closed and what support might have helped them stay open. These needs assessments offer quantitative and qualitative information that help to shape services for each cohort.

With the focus community decided, it is then important to recruit people who are more likely to succeed. We have found that an online application with five or six questions can help gauge candidate motivation, their community knowledge, the number of children anticipated, number of projected jobs, and related prior work experience. 

The recruitment process is designed to be inclusive of people with low incomes, without advanced degrees, or who don’t speak English as a first language. For instance, the questionnaire should deliberately be worded in simple English to avoid screening out candidates based on language or financial proficiency. (Example: “Do you have any experience with a budget for your family or managing money for a community project?”) We indicate that answering “yes” is not a requirement to be accepted into the program and that this information helps to identify what kind of support the would-be entrepreneur might need.

A childcare business incubator needs to combine small business start-up education with specific childcare business management and coaching.

Becoming a licensed childcare provider is a rigorous process that involves a lot of steps, and we look for candidates who have overcome barriers to achieving something in their personal or professional lives. It is important to keep an eye out for applicants who might appear to lack experience, but may have analogous training, work, or responsibilities that make them viable cohort candidates. 

Initial telephone informational interviews with candidates should be explicit about the program experience, including time needed to complete homework. We then ask about their envisioned service model. (Example: “Will you accept families eligible for the state subsidy program?”) For our pilot program, a panel of childcare professionals and small business advisors conducted video interviews of the most promising candidates. We learned that this could be an intimidating process, and we have since changed the video interview to be a conversation with one person from the Child Care Business Lab. We use this time as an opportunity to document support that candidates need to succeed, such as owning a laptop or having internet access.

Designing a Curriculum

Childcare is, for obvious reasons, highly regulated. States limit the ratio of children to adults, require extensive record-keeping and written policies, and have strict rules to protect the physical safety of children. Because regulation can be a barrier to entry, a childcare business incubator needs to combine small business start-up education with specific childcare business management and coaching that walks potential providers through the regulatory and licensing process. 

Key elements of the curriculum include the following:

• Business plan development, including financial templates designed to accommodate state-required child-to-staff ratios
• Education about the childcare regulatory environment, including pitfalls to avoid 
• Tips on how to find a location that meets fire marshal and childcare licensing rules
• Workforce advice, including job description templates, employee manuals, and recruiting assistance

Building strong relationships with state licensors is a must. Fortunately, our state licensors have proved to be strong partners. This state alliance has helped the incubator in many respects, including helping us address language and education barriers.

Participation in the incubator is hands-on from the outset; each person creates and shares a vision board that depicts their ideal childcare business, an exercise that transcends English language proficiency. Cohort participants then learn how to translate their ideas into a business plan using workbooks that outline the entire process. Developing a business plan is an essential element of securing start-up financing and keeping the doors to the business open. Many who consider starting a childcare business find the idea of doing a feasibility study, drafting a marketing plan, and creating a cash-flow analysis intimidating. It’s especially important for childcare leaders to understand the economics of their business—number of staff, wages, and state regulated child-to-staff ratios are key. Making it simple is what we do.

Developing Support Systems

A solid curriculum is a good starting point. Providing a network of in-person and virtual resources to support business plan development, access to capital, workforce assistance, and operations expertise is even more important because this is what gives new childcare entrepreneurs the opportunity to flourish. The cohort learning model offers a good first step in this direction by creating a strong peer network of support.

Many entrepreneurs, especially in sparsely populated areas, feel alone. Through the cohort model, they get ideas from people with similar dreams and challenges. One example of peer mentoring in action is a take on a gift exchange with family policies. Everyone brings a policy to the class, such as child behavior guidance or administering medication. Attendees are arranged in groups of four and each shares a policy and gets feedback. At the conclusion, everyone leaves with input on their idea and has three other policy ideas from their peers to consider.

In addition to their peer group, each business owner is paired with a seasoned childcare professional as a mentor who provides practical recommendations based on their industry experience. Students learn best practices for managing a childcare business and receive hiring and workforce advice, including job description templates, employee manuals and recruiting assistance, and networking events. All are coached through the licensing process and learn how to secure financing. 

This circle of support should extend to childcare employees as well. After employees are hired, the Child Care Business Lab provides a series of supportive services. In advance of day one on the job, the new employees will participate in training that prepares them for the rigors of employment, including required certifications. Because personal barriers may stand in the way, the Child Care Business Lab partners with state and community agencies to ensure that new workers have access to support systems to overcome obstacles, such as reliable transportation to work. In addition, before the childcare business opens, new staff are trained in important policies and procedures, boosting new employees’ confidence in their ability to do the job well. 

An advisory board also contributes. Its membership includes representatives from the Maine Department of Health and Human Services’ Child Care Licensing Unit, Maine Department of Labor’s Apprenticeship Program, the CEI Women’s Business Center, and the local business community. Advisors provide mentorship, an outside perspective on issues confronting childcare entrepreneurs, and access to their networks. Mentors also help boost the new childcare business owners’ credibility and inform the project leadership team of other supports the Child Care Business Lab should provide.

We also recommend that program managers offer participants one-on-one financial wellness counseling alongside the childcare curriculum. This can help people to get ready to start their own business by boosting their credit score and increasing their personal financial stability. Several Child Care Business Lab graduates improved their credit score by more than 50 points in five or six months, putting them in a stronger position to apply for business loans.

Aligning Financing with Business Needs

One big challenge that startups in any industry routinely face is finding sufficient capital to get their business off the ground. Many childcare facilities require renovation to meet zoning, fire marshal rules, or state childcare quality standards. Other up-front costs include furniture, education supplies, books, games, and playground equipment. 

Frequently, there is a mismatch between parents’ ability to pay and business costs, leaving both parents and childcare business owners with difficult financial choices. With the aim of charging affordable rates, many childcare business owners underpay staff, but beyond the pay justice issues this raises, the resulting high employee turnover and low-quality childcare can undermine the business. And for the many childcare businesses that rely on government subsidy, payments often occur weeks or even months after services are provided and care workers paid.

As a result, nearly all childcare businesses are cash-flow negative for a period and require a working capital loan to meet payroll obligations in the early months. The ideal loan terms are patient and flexible. But funding is often difficult to access due to the industry’s nontraditional collateral, tight margins, and delayed income from reimbursements for subsidized programs. 

To address these unique financial challenges, we encourage those creating a lab to consider a variety of solutions, such as reduced loan payment during the first six months (such as an interest-only period), allowing business assets for capital, relaxing credit score requirements, and creating a bridge to grant programs. 

Creativity is welcome in these scenarios and can be designed to fit the specific needs of a community. This type of creative lending is one reason that CDFIs may often be an ideal home for a childcare business incubator, as they are designed to provide flexible financing. When flexible financing can be paired with ongoing business advising, it creates a holistic support structure for entrepreneurs, which improves the likelihood of financial sustainability.

Funding Your Child Care Business Lab

There are several avenues for funding the development and implementation of a childcare business incubator, including state and federal grants, philanthropic support, and impact investor groups. Because of the growing awareness of the need for childcare, now is an excellent time to reach out to potential funding sources. 

The initial funding for our Child Care Business Lab came from federal grant funds that supported a pilot program. Then, because of the hyper-local nature of the work, local philanthropies and other place-based funders were engaged. After the initial cohorts were completed, we were able to partner with Lumina Foundation, a national foundation. A key feature of this phase of funding was combining grant funds for Child Care Business Lab programming and advising with a program-related investment for low-cost lending capital. 

Building the Network

Just as childcare entrepreneurs must balance business finances with quality-of-service concerns, so too must incubators. 

Like budding childcare providers, incubator operators themselves can benefit from peer groups, mentorship, and a network of support. This reinforces the need for knowledge sharing among those supporting childcare business development. 

One day soon I hope our field will have built a nationwide childcare business lab network to spread this work more effectively. And, in so doing, we can enable parents to work with confidence—knowing their children are getting quality early childhood education and care.